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Capitalizing on strong investor interest in housing-related stocks,
Realogy HoldingsRLGY -1.643598615916955%Realogy Holdings Corp.U.S.: NYSEUSD45.48
-0.76-1.643598615916955%
/Date(1427835972267-0500)/
Volume (Delayed 15m)
:
1186097AFTER HOURSUSD45.485
0.005000000000002560.010993843447669306%
Volume (Delayed 15m)
:
90241
P/E Ratio
46.718027734976886Market Cap
6774946246.90048
Dividend Yield
N/ARev. per Employee
497944More quote details and news »RLGYinYour ValueYour ChangeShort position
pulled off one of the year's most successful initial public offerings last week. The Parsippany, N.J.-based company, which controls the largest group of real-estate agents in the country, including brands such as Century 21 and Coldwell Banker, made its debut Wednesday at $27 a share—the high end of the expected pricing range—and finished Friday at $33.60.

While Realogy (ticker: RLGY) has an attractive fee-based business model, its shares look overpriced after their initial rally. The company is valued at $4.4 billion and has $4.5 billion of debt. Pretax cash flow, defined as earnings before interest, taxes, depreciation and amortization, or Ebitda, was $500 million in the fiscal year that ended in June. That means Realogy is valued at a stiff 18 times trailing cash flow based on its enterprise value (equity value plus debt) of nearly $9 billion. That is more than double the broad market's EV/Ebitda multiple.

Bulls say Realogy's profits are set to rise sharply with the housing market as both home sales and prices recover. The company has an asset-light structure as a franchiser of real-estate agencies. More than 60% of its cash flow comes from fees paid by agents on the commissions generated by home sales. The typical fee is 5% of commissions.

Realogy cited forecasts for an 8% to 9% rise in existing-home sales this year and a 5% uptick in prices. "There's enormous pent-up demand," CEO Richard Smith said in a presentation posted on Retail Roadshow.com. "We're very bullish on the housing recovery."

Smith calls Realogy the "purest play" on housing, because the company benefits directly from more sales and higher prices. Existing-home sales are running at a rate of 4.8 million annually, down from seven million in 2005, which leaves a lot of potential upside. Median home prices are down 24% from peak levels nationwide.

Comeback Try?

Apollo tried to salvage its Realogy investment with the IPO.

Realogy/RLGY

Recent Price

$33.60

Shares Outstanding (mil)

130

Market Val (bil)

$4.4

Debt (bil)

$4.5

Revenue (bil)*

$4.1

Pretax Cash Flow (mil)*

$500

Top Shareholder

Apollo 50%

*Year ended June Source: Company reports

The Realogy IPO offered some vindication for Apollo Global Management, the private-equity firm, which took the company private in a top-of-the-market 2007 leveraged buyout. Apollo has taken a big hit on its original equity investment of almost $2 billion, which equates to $249 a share. The firm doubled down and bought $1.3 billion of Realogy debt that was converted into equity in conjunction with the IPO. It now owns half the company and is in the black on its newer investment.

Street talk is that Realogy could generate $725 million of pretax cash flow in 2013 and $1.75 in fully taxed profit per share. That suggests Realogy is valued at 12.4 times cash flow and 19 times forward earnings, which looks rich. The shares are vulnerable to any signs of a slowing in the housing recovery. The company still has a sizable debt load.

Put a still-generous multiple of 11 on the next year's projected cash flow and Realogy's stock is valued at around $27. That's 20% below current levels.